How to Repay Your Student Loans

Too much debt? Too little income? Find a plan that works for you.

You got through college with straight A's, but now you face your first big test as a young adult: squaring a starting salary with the payments on your student loans.

Best strategy? Figure out a way to make the federal loans manageable, then throw every spare nickel at the private loans (assuming the lender allows you to prepay), says Edie Irons, of the Project on Student Debt. "Because there are fewer protections, it should be a priority to try to pay off private loans first."

Luckily, you have plenty of choices on the federal-loan side, whether your loan comes from a private lender who participates in the Federal Family Education Loan (FFEL) program or from the government's Federal Direct Loan program.

I have Stafford loans and want to repay them as painlessly as possible. Which plan should I choose? You're automatically enrolled in the standard repayment plan unless you say otherwise. Stick with this plan, under which you make 120 equal monthly payments over a ten-year period. Be sure to take advantage of any discounts, such as 0.25% off the interest rate for having payments deducted automatically. If you want to unload your loans on a faster timetable and save on interest, pay a bit more than the allotted amount each month. Be sure to specify in writing that you want the extra amount to be applied to the principal.

My salary is low now, but I expect it to jump in the next few years. The graduated repayment plan suits your situation. Monthly payments start low and rise in increments over the ten-year period. Because you pay less in the early years, you pay a bit more in interest over the life of the loan than you would with the standard plan.

Say you have a total of $25,000 in Stafford loans, each with a 6.8% interest rate. With a standard repayment plan, you'd pay $288 in 120 monthly payments, for a total of $34,524. With a graduated plan, you could pay $142 a month for the first three years and $375 a month for the remaining seven. Your total payments would add up to $36,590.

I have $40,000 in Stafford loan debt and can't afford the monthly payments. The extended repayment plan applies to borrowers who owe more than $30,000 on their federal loans. The plan lets you stretch the payments as long as 25 years, lowering the monthly amount but increasing the cost of the loan. On $40,000, you would pay $227 a month for 25 years, for a total of $83,289.

I'm a freelance writer. I don't expect to earn enough to make my payments affordable anytime soon. If you're in the Federal Direct Loan program, look into the income-contingent plan, which calculates monthly payments according to your income, family size and the total amount of your loans. You get up to 25 years to repay the debt, after which the feds forgive the remainder.

Thanks to recent legislation, borrowers who work in the public sector -- say, as a firefighter, teacher or government employee -- and who make 120 payments after July 2008 in this or the standard plan qualify for loan forgiveness after ten years. The income-contingent plan is available only to borrowers in the Direct Loan program, which you can switch into by consolidating your loans in that program.

I tried to sign up for the income-contingent plan, but my lender says it isn't available. If you're in the FFEL program, your only income-based choice, for now, is the income-sensitive plan. With this arrangement, you can choose to pay 4% to 25% of your gross monthly income over a certain number of years within the ten-year schedule.

If you expect your income to remain low indefinitely, you're better off with the income-contingent plan, which does not require that payments cover accruing interest. You can get access to that plan only by consolidating your loans with the Direct Loan program.

Or you could wait until July 2009, when you'll also have the option of the income-based repayment program. This plan uses a formula that identifies borrowers with a high debt-to-income ratio. Those who qualify can make smaller payments -- and keep more of their monthly paycheck -- than in either of the other income-based programs. The feds forgive any remaining debt after 25 years, or after ten if you meet the conditions for public-service forgiveness. See how it works by using the calculator at www.finaid.org.

I have $25,000 in federal loans and $30,000 in private loans. What's the best way to get a handle on them? Consolidating the federal loans gives you the convenience of a single monthly payment -- a benefit to all borrowers -- and lets you stretch the repayment period to as long as 30 years, based on the amount of your debt. Consolidations are also a way to lock in rates on older, variable Staffords. The 2008Ð09 rate -- 4.21% -- is worth nailing down; consolidate during your grace period and you lock in the lower, grace-period rate, now 3.61%.

You can consolidate only your federal loans, but the feds consider all qualified education loans, including the private ones, in calculating the repayment period. For that reason, consolidation has the potential of giving you the longest possible repayment period on the federal loans and the lowest monthly payments. Keep in mind that the longer the repayment period, the more you pay overall.

Consolidating doesn't mean you have to go with a longer schedule, however. Once you've consolidated, you can still choose among the various repayment plans, including the ten-year program.

I still haven't found a job and don't know how I'll be able to make my payments. The federal loan program offers a respite on repayment if you are unemployed, are experiencing economic hardship, have returned to school more than half-time or are on active duty in the military. If you defer based on unemployment or economic hardship, you can postpone repayment one year at a time for up to three years. The interest stops building on subsidized Staffords during that time but accrues on unsubsidized Staffords. If you can, continue paying the interest during the deferment to avoid creating a much bigger debt.

You have to provide documentation to get a deferment for unemployment or in-school status. The feds determine economic hardship based on your income and debt level, not your definition of what feels comfortable. To find out if you qualify, use the economic-hardship calculator at www.finaid.org.

I'm in over my head on my federal student loans. Help! If you don't qualify for a deferment on your federal loans and you don't see yourself in the other scenarios outlined here, apply for forbearance. Forbearance also puts repayment on hold, in some cases for a year at a time for up to three years, and in others for as long as five years. Interest keeps accruing on both subsidized and unsubsidized loans, making forbearance less advantageous than deferral but better than going into default.

Because the meter keeps ticking on interest, try to get back on track as soon as possible, says Martha Holler, of Sallie Mae, the loan company. "The goal is not to be in forbearance for the maximum amount of time."

Whatever your problem, face it now rather than later, says Gary Carpenter, a certified college financial planner in Syracuse, N.Y. "Lots of kids get into trouble because they don't contact lenders soon enough," says Carpenter. "Once they get into default, lenders won't listen." He says it's better to go to your lenders right away and say, "'Hey, I've got a problem -- I need help.'"

Via

Congress Braces for Student-Loan Crisis, While Declaring It Unlikely

When Nelnet, the nation's No. 2 consolidator of student loans, announced in January that it would stop making consolidation loans, Number 3 NextStudent now has said the same, members of Congress didn't seem to bat an eye.

A week later, the College Loan Corporation, the eighth-largest originator of federally guaranteed loans, followed suit.

If you want a collage loan you better start applying six months before you need it since it might be non existent. Hillery Clinton and Obama both want to do away with the FFELP program altogether if elected, and that would mean no more federal lending for student loans.

Economy bogs down student loan options

Once easy to get, the availability of private or alternative education loans may be hindered by more stringent regulations on lending, prompted by the unstable economy.

A student with a less-than-perfect credit history could get a high-interest loan from a private lender in past years, but this may not be the case now, said Mark Kantrowitz, publisher of finaid.org.

The Project on Student Debt identified the mortgage market as the culprit of student loan worries in their article, "The Real Story on Student Loans and the Credit Squeeze."

"Mostly because of problems in the mortgage market, there has been a decline in the number of investors willing to purchase some types of financial instrument," the article reads. "Some student loan companies have been using these methods of financing to raise money to make student loans. With the unexpected loss of financing, these companies will need to either get out of the student loan market or revamp their financing methods."

But the good news is that experts agree the credit crunch is the lenders', not the students', problem.

At a United States Senate hearing March 12, Sen. Edward Kennedy, head of the Senate Education Committee, said the credit crunch is primarily impacting banks and other lenders, as many financial lenders can no longer afford to lend educational loans.

Kantrowitz supported Kennedy's stance that the economy is more severely affecting the lenders and not students.

Kantrowitz also said the diminishing competition of loan lenders shouldn't be a huge concern to students now, but may be next year.

"Choices are going to be much more limited...I'm much more concerned about lenders leaving a year from now," he said.

Bob Shireman, president of The Institute for College Access and Success, and Kantrowitz recommended students fully exhaust all possibilities for receiving federal aid before turning to alternative loans. Students sometimes do not fill out the Free Application for Federal Student Aid (FAFSA) because they think they won't be eligible for aid or because applying for alternative loans is easier.

Kennedy estimated 40 to 60 percent of students haven't taken full advantage of federal options for financing college.

The Web site for "The Project on Student Debt" unveiled a way students can get extra Stafford loans so they don't need to go to private lenders.

"If your parents have serious credit problems and can't get a (federal) PLUS loan, the financial aid officials at your school can double your eligibility for federal students loans," allowing students to borrow up to $46,000 in Stafford loans, reads the Web site.

Kantrowitz encouraged students to tell their financial aid officers if they still cannot get the loans they need. Financial aid officers can sign the college up for the Direct Loan program, in which money for college loans comes straight from the Federal Reserve.

Loan Forgiveness? Can my loans really be paid off for me?

It is called Loan Forgiveness!!

Under certain circumstances, the federal government will cancel all or part of an educational loan. This practice is called Loan Forgiveness. To qualify, you must:

* Perform volunteer work;
* Perform military service;
* Meet other criteria specified by the forgiveness program;
* Teach or practice medicine in certain types of communities;
.

To find out whether you qualify for loan forgiveness, talk to the HR staff at your employer.

Volunteer Work

These volunteer organizations offer loan forgiveness and are very informative:


Peace Corps. Volunteers may apply for deferment of Stafford, Perkins and Consolidation loans and partial cancellation of Perkins Loans (15% for each year of service, up to 70% in total). Volunteers make a real difference in the lives of real people with two yearsof service in more than 70 developing countries. Contact the Peace Corps at 1111 20th St., NW, Washington, DC 20526 or call 1-800-424-8580 or 1-202-692-1845.

Volunteers in Service to America (VISTA). Volunteer with private, non-profit groups that help eradicate hunger, homelessness, poverty and illiteracy. Provide 1700 hours of service and receive $4725. Call 1-800-942-2677 or 1-202-606-5000.

AmeriCorps. Serve for 12 months and receive up to $7400 in stipends plus $4725 to be used towards your loan. Call 1-800-942-2677.

Teaching

Students who become full-time teachers in an elementary or secondary school that serves students from low-income families can have a portion of their Perkins Loan forgiven under The National Defense Education Act. This program forgives 15% of your loan for the first and second years of teaching service, 20% for the third and fourth, and 30% for the fifth. Contact your school district's administration to see which schools are eligible.

Mississippiteachers who currently have their Alternate Route Teaching License and teach in a shortage area may be eligible for the Teacher Loan Repayment program. Visit the Mississippi Office of State Student Financial Aid web site at www.ihl.state.ms.us or call 1-601-432-6997.

The American Federation of Teachers maintains a list of other loan forgiveness programs for teachers.


Military

Students who are in the Army National Guard may be eligible for their Student Loan Repayment Program, which offers up to $10,000. (Note, the military and veterans' associations provide many scholarships and tuition assistance programs. See the section on Military Aid for details.)


Legal and Medical Studies

Many law schools forgive the loans of students who serve in public interest or non-profit positions. For more information, contact Equal Justice Works (formerly the National Association for Public Interest Law) at 2120 L Street, NW, Suite 450, Washington, DC 20037-1541 (phone 1-202-466-3686 or fax 1-202-429-9766).

The US Department of Health and Human Services offers loan forgiveness programs through the National Health Service Corps and the Nursing Education Loan Repayment Program. These programs offer loan forgiveness to physicians and registered nurses who agree to practice for a set number of years in areas that lack adequate medical care (including remote and/or economically depressed regions).

The US National Institutes of Health's NIH Loan Repayment Programs repays up to $35,000/year of student loan debt for US citizens who are conducting clinical medical research.

If you're a California resident, contact the Office of Statewide Health Planning and Development (State Loan Repayment Program, 400 R Street, Room 330, Sacramento, CA 95811; 1-916-326-3745). Other states may have similar programs.

Many hospitals and private healthcare facilities use loan forgiveness to recruit occupational and physical therapists. Contact the American Physical Therapy Association (1111 North Fairfax St., Alexandria, VA 22314-1488; 1-800-999-2782) or the American Occupational Therapy Association (P.O. Box 31220, 47200 Montgomery Lane, Bethesda, MD 20824-1220; 1-301-652-2682).

Other loan repayment programs for medical school students include:

* The National Institutes of Health (NIH) Educational Loan Repayment Programs include the NIH AIDS Research Loan Repayment Program, NIH Clinical Research Loan Repayment Program, NIH General Research Loan Repayment Program.
* Nicholas J. Pisacano MD Memorial Foundation Inc. (American Board of Family Practice)
* Disadvantaged Health Professions Faculty Loan Repayment Program
* Indian Health Service (IHS) Loan Repayment Program
* American Academyof Family Physicians Foundation
* US Air Force, Army, and Navy Financial Assistance Programs

The American Association of Medical Colleges (AAMC) hass a database of state and other loan repayment programs for medical school students that wish their loans forgiven.

Other Paths to Forgiveness


Students who receive the Michael Murphy Loan to study law enforcement, law, probation and parole, penology, or other related fields are eligible to work off one-fifth per year as a State Trooper (or related law enforcement official) in Alaska. Contact the Alaska State Troopers, Director's Office Scholarship Fund, 5700 East Tudor Rd., Anchorage, AK 99507; 1-907-269-5511.

Students who complete a bachelor's degree at Baker University's College of Arts and Sciences may be eligible for the school's loan forgiveness program. Contact Baker University, P.O. Box 65, Baldwin City, KS 66006-0065; 1-913-594-6451.


Maryland state and local government employees who earn less than $40,000 gross annually may be eligible for a loan assistance/repayment program to study law, nursing, physical and occupational therapy, social work and education. Contact the Maryland State Scholarship Administration, 16 Francis St., Annapolis, MD 21401; 1-410-974-2971 x146.

Federal Government Loan Forgiveness Programs

Perkins loans and Stafford Loans can be cancelled for full-time service as a teacher in a designated elementary or secondary school serving students from low-income families, special education teacher (includes teaching children with disabilities in a public or other nonprofit elementary or secondary school), qualified professional provider of early intervention services for the disabled, teacher of math, science, foreign languages, bilingual education, or other fields designated as teacher shortage areas, employee of a public ornon-profit child or family service agency providing services to high-risk children and their families from low-income communities, nurse or medical technician, law enforcement or corrections officer, staff member in the educational component of a Head Start Program, service as a Vista or Peace Corps Volunteer and service in the Armed Forces (up to 50% in areas of hostilities or imminent danger).

See also the US Department of Education's pages on Cancellation/Deferment Options for Teachers and Cancellation for Childcare Providers, as well as the Teacher Loan Forgiveness Form.

Secondary school math and science teachers, and elementary/secondary school special education teachers who commit to working in high-need schools for five years can obtain up to $17,500 in Staffordloan forgiveness. They must teach full time for five consecutive years in a qualifying low-income school and be "highly qualified". (The Taxpayer-Teacher Protection Act of 2004, HR 5186, increased the amount of forgiveness from $5,000 to $17,500 on October 30, 2004.)

The Federal Student Loan Repayment Program allows federal agencies to establish loan forgiveness programs to help recruit and retain employees. This is technically a loan repayment program and not a loan forgiveness program, as the agencies make payments directly to the loan holder and the payments represent taxable income to the employee. The agencies can repay up to $10,000 in Federal student loans peremployee per calendar year, with a cumulative maximum of $60,000 per employee. Employees must agree to work for the agency for at least 3 years. For more information, see the Student Loan Repayment Program FAQ. This program is authorized by 5 USC 5379 (alternate link) and 5 CFR 537. Federal Employee Student Loan Assistance Act (P.L. 108-123, 11/11/03) increased the repayment limits to $10,000 per employee per year and $60,000 per employee cumulative. (The federal government's jobs site is located at www.usajobs.opm.gov. They also have a site focused on jobs for recent graduates.)

Taxability of Loan Forgiveness

Under current law, the amount forgiven represents taxable income for Federal income tax purposes in the year it is written off.

There are, however,a few exceptions. If the student loans were forgiven by a tax-exempt educational institution, the forgiveness is excluded from gross income if the student is not employed by the educational institution, the forgiveness is contingent upon the student working for a specific number of years in certain professions (e.g., primary health services for participants in the National Health Service Corps loan repayment program or certain state programs under the Public Health Service Act) and the student's employmentfulfills a public service requirement (e.g., Community Service Loan Forgiveness programs). The Taxpayer Relief Act of 1997 extended this treatment to include loans forgiven by tax-exempt charitable organizations. See Chapter 5 of IRS Publication 970 for more information.

There are proposals to make other forms of student loan forgiveness non-taxable, such as the forgiveness of income-contingent repayment balances after 25 years, but none have become law yet.

Individual states may have different treatments of loan forgiveness for state income tax purposes. For example, Pennsylvaniadoes not treat loan forgiveness as taxable income. See Cancellation of Indebtedness Student Loan Forgiveness, PennsylvaniaPersonal Income Tax, PIT-00-093, July 12, 2000.

Why should I consolidate my student loans?

By consolidating your student loans, you can bundle all of your loans and previous consolidations together into a single loan, which means that you will have only one lender and one payment to deal with. Student loan consolidation also gives you a chance to lock in at a low interest rate, which can save you a great deal of money over time. Now if your lucky enough to have a previous student loan consolidation at a lower rate and you took more loans out you can consolidate your new student loans at the higher interest rate into your old lower rate consolidation. By using the weighted average it will help to lower the rate on your new loans! Instant savings and most of the time a consolidation will lower your payments up to 51%